Jon Krause

The Market Confidence Bugaboo

Governments around the world are now cowering in fear of "market confidence" – that ineffable object of desire that makes officials impement policies they don't really believe in. Indeed, if the current crisis gets worse, it will be political leaders that bear primary responsibility – not because they ignored markets, but because they took them too seriously.

CAMBRIDGE – A specter is haunting Europe – the specter of “market confidence.”

It may have been fear of communism that agitated governments when Karl Marx penned the opening line of his famous manifesto in 1848, but today it is the dread that market sentiment will turn against them and drive up the spreads on their bonds. Governments all over are being forced into premature fiscal retrenchment, even though unemployment remains very high and private demand shows few signs of life. Many are driven to undertake structural reforms that they don’t really believe in – just because it would look bad to markets to do otherwise.

The terror spawned by market sentiment was once the bane of poor nations alone. During the Latin American debt crisis of the 1980’s or the Asian financial crisis of 1997, for example, heavily indebted developing countries believed they had few options but to swallow bitter medicine ­– or face a stampede of capital outflows. Apparently, now it’s the turn of Spain, France, Britain, Germany, and, many analysts argue, even the United States.

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